Using Advertising to Engage the Price Sensitive Consumer

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1 Using Advertising to Engage the Price Sensitive Consumer The level of a consumer s sensitivity to price has a significant impact on how they respond to advertising online and in traditional media. As more product purchase decisions are being made based on price rather than the brand or convenience, it is important for marketers to understand which advertising methods are most effective at driving action with these consumers. This research reviews how a consumer's demonstrated sensitivity to price influences how they respond to direct mail, TV advertising, CRM and social media. It defines the different levels of price sensitive behavior and explains how marketers can leverage that insight for more accurate and efficient media plans. Price Sensitivity is Increasing Within today s uncertain economy, everyone is a value shopper. According to Forrester Research, price is becoming a more important driver in the purchasing decisions of consumers. 52% of American consumers agree that the price of a product is more important than brand names, a figure that has increased significantly over the past five years. Even as the economy has improved, price sensitivity is a habit that continues to rise. Research from Parago found that 3 in 4 consumers are more price sensitive in % of them feel their purchasing power has decreased. Key Drivers of Price Sensitivity To better understand consumer attitudes towards price and how that changes over time, dunnhumby surveyed a panel of consumers each month over a period of time. We saw that price, even more than convenience, was the most important factor determining where consumers decided to shop. Everyday low prices, sales and promotions are key drivers for price sensitive consumers. The promotions and media formats marketers use to appeal to these consumers have a significant impact on campaign performance. Marketers are Reinforcing Price Sensitivity and Hurting their Brand Brands and retailers have become more promotional over time, feeding the price sensitive nature of their customers. Instead of building long-terms sales and growing loyalty, constant discounting attracts cherry pickers causing brand equity to erode. Customers favorite brands are now the ones they have a coupon for this week million adult internet users are using online coupons in 2013, with mothers twice as likely to search for them. (source: ilovecouponmonth.com) Mobile coupons are growing in popularity, but if they are not accurately targeted, they will quickly lose effectiveness. Juniper Research Senior Analyst David Snow has stressed the importance of targeting to avoid declining effectiveness of mobile coupons. The major challenge on the user side will be ensuring relevancy - once someone starts to receive too many badly-targeted offers, or even worse, unsolicited offers, they will view mobile coupons as spam and cease to be part of the market. - Juniper Research 1

2 Four s of Price Sensitivity By understanding consumer behavior across different lenses like price sensitivity, marketers can create a clearer picture of the perfect target audience. Segmentation according to price sensitivity classifies households based on their purchase behavior toward price over time and across multiple departments. dunnhumby s analysis of buying patterns reveal four levels of price sensitivity. Consumers range from Very Price Sensitive (VPS), Price Sensitive (PS), Splurge & Save (SS) to Least Price Sensitive (LPS). dunnhumby s s of Price Sensitivity Least Price Sensitive Splurge & Save Price Sensitive Very Price Sensitive Purchase above the average price Less restricted by budget Behave differently in different parts of the store Might splurge in produce and save in soft drinks Purchase around the average price Purchase below the average price point Total price and price per volume are important Most frequent coupon users. Least Price Sensitive Most Price Sensitive Price Sensitivity is Not Related to Income or Demographics Through dunnhumby s analysis across brands and retailers, we have been able to dispel some common marketing myths about price sensitivity and the price sensitive consumer. Price sensitive consumers can t be defined by income, age, ethnicity, gender or interests VPS shoppers are cost conscious but they are not disloyal or low spenders Promotions can be an effective tactic for driving the behavior of very price sensitive consumers, but they are not as effective for least price sensitive ones. dunnhumby found that in a distribution of females aged 25-50, age/gender demographics does not align with price sensitivity. There are almost the same number of females aged that are PS (38%) as LPS (33%). 40% 30% 20% 10% 0% Most Women Demonstrate Price Sensitive Shopping Behaviors LPS SS PS VPS These two groups have very different responses to promotions, suggesting that a brand buying TV ads targeted to moms may be wasting a lot of their advertising dollars on a non-responsive audience. 2

3 Marketing to Price Sensitive Consumers Marketers have been trained to think in terms of demographics but now there are more precise ways to view consumers. By evaluating what a consumer buys over time, marketers can build a shopping DNA for each household that provides insight into their sensitivity to price so advertising can be differentiated for the specific audience. Price sensitivity is an important consumer dimension when targeting and measuring advertising. Here are examples of how price sensitive consumers respond to direct mail couponing, CRM programs, TV and instore promotions, and social media. Direct Mail Coupon Redemptions Increase as Price Sensitivity Rises Coupon redemption rates are highest among VPS shoppers. In a direct mail campaign study, VPS shoppers redeemed over 15% of coupons for a single brand mailer and over 35% for a multiple brand mailer. Redemption rates steadily decreased along the price sensitivity segments. Very Price Sensitive Consumers are Most Responsive to Direct Mail Coupons 40% 30% 20% 10% 0% Single Brand DM Multi-Brand DM LPS SS PS VPS CRM Programs Increase Price Sensitivity and Improve Loyalty TV is Most Effective When Combined with In-Store Promotions Different consumer segments respond to TV and store promotions inversely as well. If your brand is a higher priced item in the category and appeals to LPS shoppers, TV and in-store may not be as effective at changing behavior as other marketing vehicles. That doesn t mean there isn t place for it, it is more to drive trial and awareness. For brands appealing to VPS shoppers, the combination of TV and in-store promotions are most effective at driving sales with typical shoppers TV and Circulars are Most Effective with Very Price Sensitive Shoppers 0 Yogurt A Yogurt B Cereal A Cereal B TV Only Circular TV + Circular Consumers participating in a company s CRM program are 19% more likely to be VPS. Although not the most extreme coupon users, they are very responsive to coupons offers. CRM members are 70% more likely to buy the brand with a coupon than typical consumers. Once engaged in a CRM program, VPS shoppers are valuable and loyal to the brand. They spend 14% more than the average retained customer and are 36% less likely to leave the brand TV Alone is Most Effective with Least Price Sensitive Shoppers Yogurt A Yogurt B Cereal A Cereal B TV Only Circular TV + Circular 3

4 Marketing to Price Sensitive Consumers Social Media Brand Advocates are Price Sensitive, but Very Loyal It is widely accepted that Twitter followers and Facebook fans tend to be deal seekers. Our analysis has shown that brand advocates do skew towards the price sensitive and very price sensitive segments. Social media brand advocates are much more brand loyal than average brand buyer and spend more on the brand than the average household proving that price sensitivity doesn t necessarily equate to brand promiscuity. % HHs in Segment 50% 40% 30% 20% 10% Brand Advocates in Social Media are the Most Loyal Customers These are some of a brand s best customers. Advocates are very loyal to the brand. They have personal experience with the product and a willingness to share their opinions and recommendations with many others in person and online across social media. 0% Average HH Brand Advocate 4

5 Price Sensitivity Impacts All Types of Products Price sensitivity is not limited to certain types of product categories. Brands appealing to all types of consumers can improve relevance and response rates by targeting based on price sensitivity. While analyzing three online media programs across very different product categories, we found they resonate differently among the price sensitive segments. Broad Appeal Products Even products with the broadest appeal can benefit from targeting the most price sensitive. A product of a famous, global brand in the carbonated soft drink category appeals to everyone. Yet the highest response to the online ad came from VPS shoppers. VPS shoppers contribute a 19.1% sales and 28.6% unit uplifts, while LPS shoppers contributed 0%. A brand manager with this type of promotion cannot think that their ad will appeal to everyone. Price Band % Sales Sales /HH % Units Unit /HH Least Price Sensitive 0% $0.00-0% Splurge & Save 3.1% $0.003 Not Significant 2.8% Not Significant Price Sensitive 7.9% $ % 9.9% % Very Price Sensitive 19.1% $ % 28.6% % Upscale Products Price Band Upscale products can resonate more with price sensitive consumers depending on the vehicle. A premium whitening toothpaste brand may target LPS shoppers, but the competitive nature and frequent in-store promotions in this category drive a high proportion of purchases from PS. Yet this online ad, with a downloadable coupon, only resonated with the PS and VPS shoppers. If the target audience for the product is LPS and a brand manager is planning an online ad just to those households, this data suggests that isn t the right approach.. % Sales Sales /HH % Units Unit /HH Least Price Sensitive 0% $0 Not significant 0% 0 Not significant Splurge & Save 0% $0 Not significant 0% 0 Not significant Price Sensitive 2.2% $ % 3.7% % Very Price Sensitive 8.4% $ % 8.9% % Convenience Products In a counterintuitive example, a product frequently purchased by VPS shoppers, frozen handheld sandwiches, saw a 23.31% sales uplift from LPS shoppers. This ad was for a product in the frozen handheld sandwich category. You would expect a product like that to match the graph above the distribution skews towards PS and VPS. However, the online ad performed best with LPS shoppers and didn t work as well for VPS. Price Band % Sales Sales /HH % Units Unit /HH Least Price Sensitive 23.31% $ % 5.68% Not Significant Splurge & Save 0.00% $0.00 Not Significant 0.00% Not Significant Price Sensitive 22.31% $ % 23.33% % Very Price Sensitive 1.45% $0.01 Not Significant 0.00% Not Significant 5

6 About This Research Using Advertising to Engage the Price Sensitive Consumer is the culmination of a series of case studies conducted by dunnhumby linking anonymous, privacy-protected data of in-store purchase behavior for over 60 million U.S. households to the media exposure data of those households. dunnhumby partners with companies like Datalogix and TiVo Research and Analytics (TRA) to link the data sources. About dunnhumby dunnhumby is the world s leading customer science company. We analyze data and apply insights from more than 400 million customers across the globe to create better customer experiences and build loyalty. Our insights and strategic process help clients create competitive advantage and enjoy sustained growth. dunnhumbyusa is a joint venture of The Kroger Company and London-based dunnhumby. dunnhumby employs more than 2,000 employees in offices throughout Europe, Asia and the Americas, and serves a prestigious list of companies including The Kroger Co., Tesco, Coca-Cola, General Mills, Kimberly-Clark, Macy s, PepsiCo and Procter & Gamble. For more information, please visit us at 6